The SEC is proposing new CEO pay disclosure, but it's not as simple as it may seem.

Federal regulators want companies to reveal how much more their chief executives make than a typical employee, but the disclosures may not help investors determine whether a CEO's pay is out of step with his peers.

Analysts say the so-called pay ratios will vary based on differences in how companies deploy their workforces and how they'll crunch the numbers.

ENLARGE

The SEC has proposed that companies compute the pay of their median worker and compare that figure to the pay of the CEO.
Bloomberg News

Ratios at companies with predominantly U.S. employees will likely be lower than at companies with lower-paid employees abroad. Companies that outsource work will post different ratios than rivals that use their own employees to perform the same tasks. Part-time and temporary employees could further skew the ratio, since the Securities and Exchange Commission said they must be included.

"I just don't see how there's going to be a company-to-company comparison that's going to be all that meaningful," said Mark Borges, a principal at executive-compensation consultant Compensia Inc. Mr. Borges thinks the ratio will be most useful in assessing pay equity at a single company over time, as it grows or shrinks.

More

The SEC on Wednesday proposed that companies compute the pay of their median worker and compare that figure to the pay of the CEO. The median is the point where half the workers make more and half make less. The proposal would flesh out a provision of the 2010 Dodd-Frank financial-reform law. The SEC said it would accept comments on its proposal for 60 days. The rule will likely take effect in 2015 or 2016, depending on when the SEC takes final action.

In its proposal, the SEC said companies could use differing methods to identify their median employee, including looking at a sample, rather than all employees. Analysts said that provision, aimed at reducing the record-keeping burden on large, global companies, would make company-to-company comparisons more difficult.

ENLARGE

The freedom in selecting the median-paid employee drew praise from one large global company that met with SEC commissioners and staffers as they drafted the rule. Health-care company Johnson & Johnson credited the agency's "practical approach" and consideration of compliance costs. J&J said the rules "appear designed to provide significant flexibility" to companies trying "to comply with an otherwise onerous disclosure requirement."

At the same time, Arthur Kohn, a partner who specializes in executive compensation at Cleary Gottlieb Steen & Hamilton LLP, said the flexibility "undermines the ability to compare [ratios] on an apples-to-apples basis."

Radford, a consulting unit of Aon PLC, offered a glimpse of the complexity after Dodd-Frank passed in 2010, when it analyzed salary data for employees at 253 technology companies. The sample was drawn from more than 1,500 companies that annually tell Radford how much they are paying employees, from the executive suite to the factory floor.

At companies with less than $200 million in annual revenue, the CEO made roughly 10 times the typical employee; at companies with more than $3 billion in annual revenue, the CEO made 78 times the typical employee. At companies with only U.S. employees, the CEO made 20 times the typical employee; at companies with global operations, the CEO made 42 times the typical employee.

"The biggest lesson we took away is that it's going to be difficult to draw company-to-company comparisons," said Ted Buyniski, a senior vice president for Radford.

Many companies in the analysis were in the same corners of the tech industry, often rivals of one another, but had different results. For example, Mr. Buyniski said, the ratio for the CEO of a semiconductor maker with factories in the U.S. will likely be lower than a rival with factories in East Asia.

"When you're talking about global companies, you may be in a situation where you have two similarly paid CEOs who have dramatically different pay ratios," he said.

The same dynamic would be evident in other industries. Yum Brands Inc., owner of Taco Bell, franchises most of its U.S. restaurants, but employs tens of thousands of workers at company-owned restaurants in China. Chipotle Mexican Grill Inc. owns its restaurants, almost all of which are in the U.S.

The SEC acknowledges that differing corporate strategies and structures may affect the ratios. In its proposal, the agency said comparing the ratio from one company to another may not be "achievable" or "justifiable," and could lead to "potentially misleading conclusions and to unintended consequences."

Supporters of the rule hope that highlighting the pay disparity will prompt companies to cut CEO pay, raise the pay of lower-level workers, or both. In a letter to the SEC, Sen. Robert Menendez, a New Jersey Democrat who wrote the pay provision, said investors deserve to know "whether public companies' pay practices are fair to their average employees, especially compared to their highly compensated CEOs."

Supporters say they don't expect investors to compare the pay ratios of companies in different industries. Brandon Rees, acting head of the AFL-CIO's Office of Investment, said the numbers will be more useful in comparing peers; even then, he said, comparisons might be skewed by whether a company uses its own workers or farms tasks out to subcontractors.

But Mr. Rees said the rule would prompt more disclosure about those workplace practices. "This rule will encourage the companies to better describe those differences and help investors better understand those companies," he said.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.